The Debate Continues Over Whether Life Settlements Are Really Securities

The SEC's Life Settlements Task Force issued a report recommending that the agency ask Congress to officially categorize life settlements as securities.

A life settlement is a financial transaction in which an older adult sells his/her life insurance policy to an investor for a lump sum payment. The investor then makes the monthly payments on the policy and is entitled to the payout upon the holder's death. Over recent years, the sale of life settlements has exploded into a controversial billion-dollar industry.

One of the central controversies focuses on the thin line between a life settlement transaction and a STOLI (Stranger-Originated Life Insurance) investment. Stranger-originated life insurance investments are coming under increasing scrutiny from state and federal regulators. The Ohio Department of Insurance, for example, recently issued a consumer alert, warning consumers to "proceed with caution" when considering participation in a STOLI arrangement.

According to one perspective discussed in the InvestmentNews article, defining life settlements as securities would enable concerned states like Ohio to properly regulate "legitimate life settlements" while preventing "abusive transactions, including almost all forms of stranger-originated life insurance."
A main argument against the Task Force's recommendation rests on the supposition that the SEC already has the authorization to regulate some of life settlement transactions as securities under certain circumstances.

Ohio investors will have to wait and see which side the SEC decides to take.


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